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Monthly Archives: December 2012

Thanks to provisions included in the National Defense Authorization Act for FY 2013, service members will be better protected against abusive interest rates and loan security requirements in connection with high-cost credit products.

The provisions amend the Military Lending Act (MLA) of 2007 and empower the Consumer Financial Protection Bureau and the Federal Trade Commission to enforce the MLA’s 36 percent rate cap and other important safeguards. In addition, the Department of Defense (DOD) will be required to conduct a detailed study of the abusive credit products frequently used by service members. Once that report is issued, the Department will review the effectiveness of existing MLA rules and evaluate the need for new rules to bring lenders into compliance.

The 2007 law set an inclusive rate cap of 36 percent on all loans to service members. It also barred lenders from securing loans with personal checks, debit authorizations, allotments of military wages, or car titles.

Under the DOD’s current rules, however, these protections apply only to short-term payday loans, car title loans, and tax refund anticipation loans, and not to similar loans with longer payback periods. A Consumer Federation of America Report released in June 2012 found lenders taking advantage of these definitional loopholes to offer long-term or “open-ended” variants of the loan products excluded from the DOD definition and not subject to the MLA protections.

On December 4, the Senate approved a Defense authorization bill (S. 3254) that specifically applied the 36 percent rate cap and loan security restrictions to longer-term loans and open-ended credit. The Senate bill would not have required a lengthy study and rulemaking process. Unfortunately, these provisions were not included in an earlier, House-approved bill, and were dropped from the legislation finally approved by both chambers.

“The industry trade press (unfortunately, its remarks are mostly behind paywalls) is all a-flutter” over the departure of CFPB Deputy Director Raj Date, Ed Mierzwinski reports on the Uspirg consumer blog. Date, they’re saying, must be replaced with “’another’ bank-friendly regulator.” But, as Mierzwinski points out, “Raj Date wasn’t selected as CFPB special advisor and then deputy director because he was ‘bank-friendly’ or because he had a banking background; he was selected by Professor Elizabeth Warren and Treasury Secretary Tim Geithner because his entire background, including his additional consumer background, made him qualified to become CFPB director if its director left. His replacement needs to have the same pro-consumer qualifications. Nothing in the law degrades the position of Deputy Director to merely ‘someone approved by the banks.’

“Some of those whispers [Mierzwinski writes] may be coming from candidates who may be simply self-promoting themselves, which is engaging in a common but not so harmless Washington game. In doing so, they serve the goal of powerful special interests, which is to create a false narrative or atmospheric intended to end up with one answer — that the CFPB’s deputy director spot is reserved for an industry player. Why? In particular they claim, to ‘balance out’ against CFPB’s ‘extreme’ pro-consumer bent.

“The CFPB does not have any sort of extreme pro-consumer bent. Quite simply, it is charged by the Congress and its enabling legislation to make financial markets work more effectively and fairly for consumers. Most industry lobbyists, who grew up in a town where federal bank regulators sometimes did exist to serve industry, not the public interest, don’t like consumers having their own regulator at the table. They’d prefer to go back to the days of little or no regulation, which ended in 2008 with the spectacular implosion of our financial system and then our economy.

“The CFPB was established as a consumer protection agency in response to that implosion– the biggest financial crisis this country has faced since 1929.

“The deputy director plays an important role at the CFPB, and would by law serve as acting director in the event of the director’s absence or resignation. This means that the deputy director cannot have an industry bias, but must be qualified to protect consumers against dangerous or unfair practices in the financial markets.

“Raj Date certainly had industry experience but he also had consumer experience. He founded and ran the non-profit Cambridge Winter Center, which developed policy supportive of the the need for a CFPB before the CFPB was established. He sat on the board of Demos, a think tank that is a member of the PIRG-backed Americans for Financial Reform. He then was hand-picked by Professor Elizabeth Warren to help her set the agency up.

“His management experience is replicable at other financial agencies or at large non-profits or other governmental units, such as state banking departments or attorneys’ general offices (where Director Richard Cordray came from). It does not need to come from industry.

“The financial industry already has plenty of voices and plenty of money to influence policy. The #2 seat at the CFPB should not and cannot be one of those voices. Selection of a new deputy director cannot be based on any balancing act or compromise. It cannot be a person agreeable to “both sides.” The person selected must be qualified to become the director of the first federal financial agency with only one job: protecting consumers. The next CFPB deputy director cannot have an industry bias. After all, the CFPB was established as a remedial reform because the previous bank regulators did have an industry bias.”

When does normal regulatory procedure become scandalous? When a federal agency fails to expedite the implementation of an influential congressman’s pet idea.

The congressman is Patrick McHenry (R-N.C.), and the idea is the mass marketing of private stock offerings, as authorized by the Jumpstart our Business Startups (or JOBS Act). In a November 30 letter, McHenry took outgoing SEC chairman Mary Schapiro to task for declining to institute a rule immediately and deciding to give the public a chance to comment first. McHenry’s complaint was soon picked up by the media, most notably by the Wall Street Journal, which, in a feverish editorial embracing all of McHenry’s talking points, accused Schapiro of having “blocked a rule” due to the influence of a “well-placed lobbyist” representing a “special-interest group.”

What’s wrong with this indictment? Every point in it. First, there’s the inconvenient fact that Schapiro, far from blocking a rule, was following customary rule-making procedure. Second, the “well-placed lobbyist” in question, Barbara Roper of the Consumer Federation of America, was actually one of scores of interested parties – including consumer and investor groups, state securities law regulators, and even a few hedge fund and private equity fund representatives – making the same general argument. Third and perhaps most important, the “special interest” that Schapiro was faulted for looking after – the community of investors – is the interest that her agency was created to protect.

And investors will need the SEC’s protection, for this is a case in which a carelessly drafted rule could open the door to all manner of flimflam. “Let the scams begin” is how Public Citizen summed up the danger. To compound matters, the Commission’s draft rule lumps hedge funds and private equity funds in with the conventional business startups that were the law’s intended beneficiaries. A Bloomberg editorial imagined the likely result: “Underperformers will flog their funds on the airwaves, on websites and in the pages of the financial press, aiming at unsophisticated investors eager to get the same fabulous returns as the Wall Street elite.”

Our coalition, like the CFA, strongly opposed the JOBS Act. It was rushed through Congress on the dubious premise that rolling back long-standing investor protections would promote job growth, and with disregard for the time-tested truth that, in Bloomberg’s words, “Markets benefit when smart oversight enhances transparency and promotes integrity.”

Yet it is important to note that neither Roper nor the law’s other critics now question the duty of the SEC, as the law directs, to lift the long-standing ban on the general solicitation of private offerings. AFR acknowledged as much in our October 5 comment letter, jointly submitted with the AFL-CIO. As we went on to note, however, the SEC “retains both the authority and the responsibility to craft a rule to implement that requirement that incorporates appropriate safeguards to protect investors and promote market integrity.”

That’s what we have been advocating – openly, not furtively – since the JOBS Act was enacted. The only undue influence brought to bear here was that of Representative McHenry and other legislators seeking to prod the SEC into ill-considered action. If these “well-placed lobbyists” could muster a bit of patience, the Commission could go about the task of crafting a balanced rule that follows the intent of the law while seeing to it that vulnerable investors aren’t hurt.

“It’s really profoundly immoral to talk about things like cutting Medicare when this policy measure sits in front of us,” AFL-CIO Director of Policy Damon Silvers told an audience of congressional staffers and others at a November 30 briefing on the financial transaction tax.

Lisa Donner, Executive Director of Americans for Financial Reform, moderated the event, which took place against a backdrop of intense debate over the so-called “fiscal cliff.” With federal tax rates at a half-century low and Washington hunting for revenue, a financial transaction tax needs to be “part of the conversation and on the table,” Donner said.

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This blog is maintained by AFR as a forum for ongoing news and commentary about the fight for effective financial reform. Blog posts represent the opinions of their authors / posters, and do not necessarily represent the views of the AFR coalition or coalition members.